The suggestion of creating an off-budget vehicle at the BGK has aroused a lot of interest in The City

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When Prime Minister Donald Tusk addressed parliament last week he was speaking to a much  wider audience than just the deputies sitting in front of him and the national public – key recipients of his message were the analysts whose recommendations guide the decisions of both equity and fixed income foreign investors.

For the most part, those analysts seem to be quite impressed with Tusk’s proposals, feeling that the investment boost he suggested could be an important factor in preventing Poland from falling into the same fiscal trap as the Czech Republic, where fiscal tightening combined with a restrictive monetary policy has driven the economy into a recession.

Many of Tusk’s spending proposals are part of existing spending plans, and his prediction that Poland would manage to extract 300bn zlotys from the 2014-2020 EU budget may be on the optimistic side. But the Tusk’s suggestion of creating an off-budget vehicle at the Bank Gospodarstwa Krajowego that would allow it to leverage lending capital up to 40bn zlotys by 2015 aroused a lot of interest.

Peter Attard Montalto, an analyst with Nomura, the investment bank, estimated that the BGK vehicle – combined with other announced investments – could boost growth by 1 percentage point next year and by as much as 1.8 percentage points in 2014. Even if some of the investment is hampered by problems in the construction sector and by some crowding out of investments, growth could rise by half a point in 2013 and by a full point a year later.

“We therefore see this as a very important announcement,” he writes.  “We do not adjust our forecasts for growth of 2.3 per cent next year and 3.7 per cent in 2014, however, as we always assumed that the government would come up with a mix of additional policy measures and fiscal loosening as growth slowed. However, while we originally saw risks to growth as skewed to the downside for next year, we now view them as being balanced or even to the upside, and to the upside in 2014 – meaning we think Poland may well be able to rapidly return to potential growth level (4.0 per cent).”

He also felt that, although the off-budget nature of the stimulus might provoke some concern at ratings agencies and investors, “the main  markets will likely concentrate on headline debt and deficit numbers falling over the medium term and remain content with the large stock of holdings of local debt by foreigners”. He reiterated that ratings agencies still appear likely to upgrade Poland next year.

Simon Quijano-Evans, emerging markets economist with ING Bank, felt that Tusk had addressed what was potentially a big problem for Polish growth – the fall in investment due to the economic crisis and to ending of the EU’s current budget.

“Tusk clearly stressed the investment picture – without any impulse from the public sector side, we will see a strong drop in investment,” he said.

While the prime minister came in for praise, the analysts were much more critical of the actions of the National Bank of Poland’s Monetary Policy Council, which they felt should have started to cut rates from their current 4.75 per cent in order to stave off a slump.

“I think the Polish problem is not the government but how the NBP has fallen behind the curve,” said Lars Christensen of Danske Bank. “It is glaringly obvious that the rate rise earlier this year was wrong, but their reluctance to cut is now hurting the economy. I hope they do something about that in November.”

He was seconded by Quijano-Evans, who said: “There really is no need to keep rates at that level. Bottom line, we need to see the central bank cutting rates in Poland, the risk is that the longer rates stay this high the more damage they inflict on the economy.”

The key, he said, was that the bank had to act now because the proposals in Tusk’s speech would not have much of a short term impact on the slowing economy.

“It will have an effect in a 12-month horizon,” he said. “There was no message in the speech that would provide a counterargument to a rates cut.”

The short term growth picture looks pretty glum to Neal Sharing of Capital Economics, consistently one of the more bearish analysis firms. He has has pencilled growth of 1.5 per cent for Poland next year, and is increasingly confident of his estimate, despite Tusk’s speech, which he said “was not a game changer”.

“We were a little nervous about that growth estimate but now I don’t think we’ll to change that,” he said, but added that, despite slowing growth, Poland was still an outperformer. “Within Europe, Poland is the best of a bad bunch.”

The analysts felt that Poland would continue to do well on debt markets, where the country has recently succeeded in placing bond issues at record low interest rates, largely because Poland remains one of the few safe countries with a positive real interest rate, which makes it very attractive to institutional investors.

“Poland is still a very healthy economy despite the slowdown,” said Christensen. “We are pretty happy with Polish debt, we have an overweight recommendation on Polish fixed income.”

Markets are also convinced that Tusk does not yet face serious political troubles, another reason why analysts liked the speech and investors are willing to put their money into the country.

“Overall then, again Mr Tusk has shown a clever line can be navigated to support the economy and potentially politically offset some of the dissatisfaction around last year’s reforms,” said Montalto.

By Jan Cienski, Financial Times

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